Headline earnings per share clarification
All JSE-listed entities are required to present this number and its related reconciliation to earnings per IAS 33 Earnings per Share (IAS 33) in their financial reports as the JSE believe there is still a large demand from users in general for a clearly defined reference number which can be used for reporting and comparative purposes.
The circular is a rules-based document with no room for variation or application by association. Yet there seems to be several misconceptions as to what headline earnings does and does not include as well as how and where it should be included in the financial statements.
To simplify things, here is a summary and extracts of the Circular 1/2023 Headline Earnings the latest circular released.
Circular 1/2023 replaces Circular 1/2021, effective for financial periods (interim and/or annual periods) ending on or after 30 June 2023. The new rules, all relating to the application IFRS 17 to headline earnings and concluding that remeasurements in profit or loss and reclassification of remeasurements from other comprehensive income to profit and loss are not adjusted for in the headline earnings determination, shall be applied consistently with the transition approach adopted for IFRS 17 Insurance Contracts (IFRS 17). If IFRS 17 has been early adopted, the IFRS 17 section of the circular should be early adopted as well.
The definition1 of headline earnings is rather long and complex, in essence it is an additional number that can be used as a performance measure permitted by IAS 33. In determining this number, one starts with earnings as determined using IAS 33 adjusting it for the re-measurements allowed per the circular, included below for your convenience, net of tax (current and deferred) and non-controlling interest.
Important things to remember when dealing with headline earnings
- Headline earnings per share may not be presented on the face of the statement of profit or loss and other comprehensive income [Paragraph 27].
- Diluted headline earnings per share must be presented with equal prominence to the headline earnings per share and must be presented in the notes in accordance with IAS 33.73 [Paragraph 16]. Headline earnings are adjusted for the same items as earnings to measure diluted headline earnings [paragraph 23].
- Companies are not permitted to override a rule even if they believe that the operating/trading and the rule is inappropriate for their specific business [Paragraph 19].
- Auditors of JSE-listed entities have an obligation to modify their audit opinion for non-compliance with the headline earnings circular where omitted or incorrectly applied [Paragraph 15].
Calculating headline earnings
Headline earnings is calculated starting with the basic earnings number calculated in terms of IAS 33 and then excluding all re-measurements that have been identified in the table below as relevant to the entity [Paragraph 17].
Remeasurements
The table below is extracted from the Circular with the ‘Item’ quoted directly from it. Only the items that cause earnings to be adjusted to determine the headline earnings (adjusting items) are included within this table, these are considered to be re-measurements (or might mistakenly be regarded as re-measurements). For the reasoning behind the decision to exclude the items, and the related definitions please refer directly to the Circular. In many instances the reason for exclusion is that the amount is a re-measurement that has not been specifically included.
Table of detailed rules per IFRS for which earnings are adjusted to determine headline earnings
| Standard/ Interpretation | Item |
IFRS 3 Business Combinations |
- Gains or losses on deemed disposals of joint ventures and/or associates. |
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations |
- Remeasurement to fair value less costs to sell (paragraphs 20 – 24); or - disposal of discontinued operation.
Impairment of assets or group of assets no longer considered to be held for sale. |
IFRS 6 Exploration for and Evaluation of Mineral Resources |
For retirement/disposal of the asset see IAS 16/ IAS 38. |
IFRS 9 Financial Instruments |
|
IFRS 10 Consolidated Financial Statements |
|
IFRS 11 Joint Arrangements | Joint operations: Look through approach – apply rules applicable to the IFRSs specific to each item. Remeasurement of interest in: - Joint operation: Apply the IFRS 9 rules. - Joint ventures: Apply the IAS 28 rules. |
IFRS 16 Leases | Lessees
Remeasurements of the right-of- use-asset classified as - Property, plant and equipment: no impact as not in profit/loss; - Investment property: Apply the IAS 40 rules. Lessors
|
IAS 12 Income Taxes |
|
IAS 16 Property, Plant and Equipment |
Gains and losses on sale of assets previously held for rental, now transferred to inventory are not excluded from headline earnings. |
IAS 21 The Effects of Changes in Foreign Exchange Rates |
|
IAS 27 Separate Financial Statements | |
IAS 28 Investments in Associates and Joint Ventures |
|
IAS 36 Impairment of Assets |
(Current assets are scoped out). |
IAS 38 Intangible Assets |
|
IAS 40 Investment Properties |
For gains/losses on investment properties held by life/long-term insurers, refer to Section I: Sector-Specific Rules for Headline Earnings - Issue 2.) |
IFRIC 17 Distributions of non-cash assets to owners | |
SIC 25 Income Taxes – Changes in the Tax Status of an Entity or its Shareholders |
|
Headline earnings reconciliation
The reconciliation of headline earnings to the reported earnings included in the notes to financial statements must be based on the earnings number and not a “per share” basis [Paragraph 27]. It must be presented in the “long form” in the annual financial statements or in the “short form” in results announcements [Paragraph 28].
The “long form” requires disclosure of the gross and net amount of each re-measurement to be excluded from headline earnings. [Paragraph 28]
The “short form” requires disclosure of the gross amount of each re-measurement, with the interest and non-controlling interest effects shown in aggregate and additional commentary provided to ensure the users can understand these amounts. [Paragraph 28]
Examples of these disclosures are provided below as extracted from the Circular.
Long form headline earnings reconciliation example [Paragraph 30]:
| Gross | Net | |
| Profit attributable to ordinary equity holders of the parent entity |
| XX |
| Less undeclared cumulative preference share dividends and related taxation |
| (XX) |
| IAS 33 earnings |
| XX |
| Less IAS 16 gains on the disposal of land and buildings | (XX) | (XX) |
| Less IAS 16 gains on the disposal of plant and equipment | (XX) | (XX) |
| Plus IAS 38 impairment of trademarks | XX | XX |
| Less the re-measurements included in equity-accounted earnings of associates[1]&[2] | (XX) | (XX) |
| Headline earnings |
| XX |
Short form headline earnings reconciliation example [Paragraph 31]:
| Net | |
| Profit attributable to ordinary equity holders of the parent entity | XX |
| Less undeclared cumulative preference share dividend and related taxation | (XX) |
| IAS 33 earnings | XX |
| Less IAS 16 gains on the disposal of land and buildings4 | (XX) |
| Less IAS 16 gains on the disposal of plant and equipment4 | (XX) |
| Plus IAS 38 impairment of trademarks4 | XX |
| Less the re-measurements included in equity-accounted earnings of associates2&3 | (XX) |
| Total tax effects of adjustments | XX |
| Total non-controlling interest effects of adjustments | XX |
| Headline earnings | XX |
1For definitions, please refer directly to the relevant circular [Paragraph 14].
2If material, an analysis must be given of the different types of re-measurements for the equity-accounted earnings.
3If it is impossible to obtain the actual tax amount from the associate, this fact should be stated, and details of any assumption made in determining the tax should be provided.
4These are the gross amounts, before taking account of the related tax and non-controlling interest.
06 September 2023
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